In its February Short Term Energy Outlook (STEO), the EIA predicts world oil consumption this month at 96.7 million barrels per day (mbpd). The supply of oil, however, is much smaller, only 93.6 mbpd, with the difference of 3.1 mbpd necessarily taken from stocks of crude oil and refined products. By historical standards, a sustained 3 mbpd tie is large, and we would expect prices to be rising in these circumstances.
The EIA sees demand continuing to recover at a good pace until mid-year, with world oil consumption forecast in July at 98.2 mbpd (but still around 4 mbpd below ‘normal’). This incremental demand is being met materially by two sources, Brazil and OPEC. We can accept the growth in Brazil’s crude oil production as a given, allowing the deadline to be delayed by one or two months. The central issue is OPEC’s intentions.
The EIA uses a volume-oriented (or demand) model, which implies that OPEC will passively increase production to meet demand and thus keep oil prices low. But why would OPEC do that? If OPEC simply maintained current production levels, the world would be 3.5 mbpd short of supply in the middle of the year. A deficit of 3.5 mbpd – 3.6% of global consumption – is too much. This would quickly drain the remaining surplus stocks, leaving only oil prices to mediate between supply and demand, just when the world economy is showing strength and momentum with the end of the pandemic. In other words, in the coming months, consumers will be prepared to compete for available barrels of oil, which should increase oil prices sharply.
Related video: Can the Saudis defend Aramco de Houthis?
This is the ‘$ 100 / barrel’ thesis.
Some important notes and warnings. In many cases, operators must commit to producing barrels before they know what the price will be. In that case, OPEC may let prices go up and add barrels at its discretion. This provides OPEC with great control and flexibility over oil prices. Certainly, higher oil prices are better, but more barrels can be added in a relatively short time if OPEC believes the market is overheating. This should encourage OPEC to test increasingly high price levels.
And, of course, Middle East policy is complicated. The complex interplay of Iran, Saudi Arabia and the United States can produce unexpected results. If Iran were more collected, it could probably bring the United States back to some sort of short-term deal, thereby freeing Tehran to increase oil exports and reduce oil prices. On the other hand, Houthi’s attack on Saudi oil facilities in the loading port of Ras Tanura could push the Saudis back into the US embrace and motivate the Kingdom to keep oil prices lower to obtain favors from the Biden government.
It is difficult to know where the balance comes from. However, now is OPEC’s best opportunity to make real money in the short to medium term. They would be foolish if they missed the opportunity.
In Steven Kopits of Princeton Energy Advisers via Zerohedge.com
More top readings from Oilprice.com: